CBN MPC Maintains Status Quo to Consolidate Economic Recovery

Godwin Emefiele CBN Governor

The Monetary Policy Committee (MPC) voted to maintain the MPR at 11.5% alongside other key monetary policy parameters at its recently concluded meeting. Contrary to expectation of divergence in voting pattern, it was noted that a unanimous decision was reached among the Committee members.

Nonetheless, the outcome of the meeting is consistent with expectation, given that the Committee remains confronted with achieving the competing goals of price and exchange rate stability and supporting economic recovery.

Consequently, the Committee also voted to retain the Cash Reserve Requirement (CRR) at 27.5%, liquidity ratio at 30.0% and asymmetric corridor around the MPR at +100bps/-700bps.

On domestic growth: The Committee noted significant improvement in economic growth in Q2-21 on account of the rebound in the Service sector and continued growth in the Agricultural sector.

The Committee also highlighted the moderate improvement in the Purchasing Managers Indices (PMIs) in August even though they were still below the 50-points that separates growth from contraction.

Nonetheless, the Committee expressed optimism that the Nigerian economy would continue to improve in the short to medium term given the (1) current level of monetary and fiscal stimulus and (2) efforts to increase vaccination and contain the pandemic.

However, the Committee called on the Federal Government to step up efforts aimed at tackling security challenges so that it would not hamper business sentiments and derail the fragile recovery. Overall, the CBN forecasts the economy to grow by 2.86% y/y in 2021FY compared to our growth forecast of 2.68% y/y.

On Inflation: The Committee expressed delight at the continued moderation in the headline inflation for the fifth consecutive month to 17.01% y/y in August (July: +17.38% y/y) supported largely by the marginal decline in the food component from 21.03% y/y in July to 20.30% y/y in August.

However, the Committee noted that the inflation rate remains well above the CBN’s corridor of 6.00% to 9.00%, indicating that the objective of price stability remains far off. Nonetheless, the Committee expressed optimism that increase in food production underpinned by the sustained intervention by the bank will help in moderating the headline inflation.

Thus, the Committee urged the fiscal authorities to build on earlier efforts to articulate a clear strategy to attract private sector involvement while improving critical infrastructure to improve the ease of doing business.

On Foreign Exchange: The Committee did not mention anything specific about the exchange rate situation at the parallel market. However, the CBN Governor stated explicitly that the apex bank does not recognise any other rate in the FX market apart from what is obtainable in the Investors and Exporters Window (IEW).

Meanwhile, the Committee urged the CBN to continue to restructure the FX market and pursue all current policies targeted at sanitising the market to (1) improve transparency and proper functioning of the market and (2) eliminate illegal FX dealers in the country

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